Cartilage contains an extensive extracellular matrix and provides mechanical strength to help resist compression in joints. Cartilage also serves as the template for growth and development of most bones. Extracellular matrix molecules such as perlecan, link protein, aggrecan, and type II collagen are expressed during chondrocyte differentiation. Mutations of these genes and regulatory factors result in impaired cartilage formation and malformation of the limbs, craniofacial bones, and appendicular skeleton. Cartilage formation is initiated by mesenchymal cell condensation to form primordial cartilage. This is followed by chondrocyte differentiation, which includes resting, proliferative, prehypertrophic, and hypertrophic chondrocytes. As the final step in endochondral bone formation, hypertrophic cartilage is invaded by blood vessels and osteoblasts, and the calcified cartilage is subsequently replaced by bone. Thus, spatial and temporal regulation of chondrocyte differentiation is essential in determining the length and width of skeletal components. We found that Pannexin 3 (Panx3) is induced during the transitional stage from proliferation to differentiation of chondrocytes and osteoblasts. We hypothesized that Panx3 regulates the switching of cell states from proliferation to differentiation, and we have tested this hypothesis using progenitor cell lines for chondrocytes and osteoblasts. Osteoblasts differentiate from mesenchyme stem cells and form bone through endochondral and intramembranous ossification. Growth factors such as BMP2 induce the master osteogenic transcription factors Runx2 and osterix. This leads to the activation of osteogenic marker genes, and subsequently to terminal differentiation of osteoblasts and mineralization. Ca2+ is a universal intracellular signaling molecule that regulates cell proliferation, differentiation, morphology, and function. Intracellular Ca2+ concentration (Ca2+i) can rise more than 5-fold via Ca2+ influx from the extracellular space and/or release from the endoplasmic reticulum (ER), an intracellular Ca2+ storage organelle. This occurs when cells are activated by extracellular stimuli such as ATP. We demonstrated that pannexin 3 (Panx3) promoted differentiation of osteoblasts and ex vivo growth of metatarsals. Panx3 expression was induced during osteogenic differentiation of C2C12 cells and primary calvarial cells, and suppression of this endogenous expression inhibited differentiation. We identified that unlike other connexin gap junction family proteins, Panx3 functioned as a unique Ca2+ channel in the endoplasmic reticulum (ER), which was activated by purinergic receptor/PI3K/Akt signaling, following activation of calmodulin signaling for differentiation. Panx3 also formed hemichannels that allowed for release of ATP into the extracellular space and bound to ATP receptors in an autocrine and/or cell-autonomous manner following the activation of PI3K/Akt signaling. In addition, Panx3 formed gap junctions and propagated Ca2+ waves between cells. Blocking the Panx3 Ca2+ channel and gap junction activities inhibited osteoblast differentiation. These findings reveal that Panx3 is a new regulator that promotes osteoblast differentiation by functioning as an ER Ca2+ channel and hemichannel, and by forming gap junctions. Most bones, such as the long bones, are formed by endochondral ossification, wherein cartilage is first formed as a template during growth and is then replaced by bone. Endochondral ossification is initiated by the condensation of mesenchymal cells, which differentiate into chondrocytes. The cells surrounding the mesenchyme condensation differentiate into the perichondrium. Proliferating chondrocytes produce a large number of matrix molecules, such as collagen II and aggrecan, to expand the cartilage template, cease proliferation at the prehypertrophic zone in the middle of the growth plate, and further differentiate into hypertrophic chondrocytes. The matrix surrounding mature hypertrophic chondrocytes is mineralized and replaced with osteoblasts. Although cartilage is a neovascular tissue, factors such as the vascular endothelial growth factor (VEGF) produced by hypertrophic chondrocytes induce vascular invasion into the perichondrium and cartilage near the terminal region of the cartilage template. This is required for cartilage matrix remodeling and osteoblast migration from the perichondrium for ossification and bone marrow formation. This indicates that endochondral bone formation is a process highly coordinated between chondrogenesis and osteogenesis. Perlecan (Hspg2) is a heparan sulfate proteoglycan expressed in basement membranes and also in cartilage. Perlecan deficiency (Hspg2-/-) in mice and humans causes lethal chondrodysplasia, which indicates that perlecan is essential for cartilage development. However, the function of perlecan in endochondral ossification is not clear. We showed the critical role of perlecan in VEGF signaling and angiogenesis in growth plate formation. The Hspg2-/- growth plate was significantly wider but also shorter, due to severely impaired endochondral bone formation. Hypertrophic chondrocytes were differentiated in Hspg2-/- growth plates; however, removal of the hypertrophic matrix and calcified cartilage was inhibited. Although the expression of VEGFA was significantly upregulated in Hspg2-/- growth plates, vascular invasion into the hypertrophic zone was impaired, resulting in almost a complete lack of bone marrow and trabecular bone. We demonstrated that cartilage perlecan promoted activation of VEGF/VEGFR by binding to the VEGFR of endothelial cells. Expression of the perlecan transgene specific to the cartilage of Hspg2-/- mice rescued their perinatal lethality and growth plate abnormalities, and vascularization into the growth plate was restored. This indicates that perlecan in the growth plate, not in endothelial cells, is critical in this process. These results suggest that perlecan in cartilage is required for activating VEGFR signaling of endothelial cells for vascular invasion and for osteoblast migration into the growth plate. Thus, perlecan in cartilage plays a critical role in endochondral bone formation by promoting angiogenesis essential for cartilage matrix remodeling and subsequent endochondral bone formation.